A brief review of the E&O climate
Like most classes of business, agents E&O attracts carriers that like to stick their toe in the water from time to time, each believing that they can understand this class. There were close to 30 companies writing this coverage in the mid-1990s; today there are about a dozen.
As of June, the Utica E&O program is experiencing a solid year with claims frequency down to six claims per 100 agencies, the lowest in the last 20 years. This equates to one claim for every 16.7 agents.
In many respects, this is not surprising. Most agents are extremely focused on E&O prevention, educating staff via loss control and training seminars and policyholders via newsletters. In addition, greater use of exposure analysis checklists has played a big role–these are the closest thing to a silver bullet for avoiding E&O claims.
A strong argument can be made that there is a correlation between the soft market and the reduction in E&O claims. After all, carriers are looking for production, and chances are greater in the soft market that they will stand behind you in the event of a problem (no guarantees). Also, companies are expanding their policy forms. In addition, nonrenewal activity is less so you have fewer accounts that you have to find a new home for.
One significant area of concern is the degree of churning going on in the marketplace. As agents shop insurance for their customers, they increase the chance of inadvertently omitting some coverage. If you move an account to another company, be sure to identify, and bring to the client's attention, any differences in coverage and secure their sign-off.
Severity and frequency
Severity refers to the average size of the claim, which through this June is slightly more than $50,000 on the judgment side and another $11,000 or so for the legal costs to defend the agent in a claim. Before you go reducing the limit of liability on your E&O policy, realize that multimillion verdicts do occur.
When it comes to who generates claims, the split is fairly even between producers and internal staff. Interesting exercise: At your next staff meeting, ask each of your staff what their E&O exposure is. I can guarantee that some, probably the receptionists, don't think they have much exposure, but as we all know, they certainly do.
Agencies heavy in personal lines actually have a higher frequency of E&O claims than heavy commercial agencies, but lower severity. Heavy commercial lines shops have lower frequency, higher severity.
As you hear at loss control seminars, "You don't have to do anything wrong to get sued." That's certainly true–in fact, Utica traditionally closes out almost 70 percent of our E&O claims for no loss payment. There is no doubt –you're a target!
The No. 1 cause of E&O claims is failure to provide the proper coverage. This has been the case for at least the last 20 years. Using an exposure analysis checklist can significantly reduce your potential for claims by helping you properly identify the exposures and recommend coverage for them.
One troubling trend is agents who delay forwarding claim information to the carriers. It appears that agents are exercising judgment on whether the underlying claim is covered. If they do not think there is coverage, there are numerous situations where they are deciding to not advise the carrier. If coverage is later found to apply and the claim reported, there is a strong chance that the carrier will deny the claim for late notice.
How do I determine what limits of liability to buy?
While there is no magic formula, there are several approaches to consider. Some agents buy a limit for their E&O equal to the maximum limit they offer for any of their clients, but the problem here is that the main cause of claims is what you failed to provide –what is not covered causes an E&O claim, not what is covered.
What's the worst scenario?
The more appropriate question might be, "What's the worst that can happen?" There is no doubt that 9/11 redefined this. What if Mother Nature wreaked havoc on your area, or if an explosion occurred at one of your client's premises? It does not take much to think of the possibilities.
E&O limits work as follows: They are typically split, say $1 million/$3 million. The first limit is the amount applicable to a specific claim. Typically, defense costs are outside the limit of liability–this is important to know. The second limit, the aggregate, in this case $3 million, is the limit for all claims against your agency in a policy year.
A prudent buying approach is to have an aggregate limit in some multiple of the per-claim limit. This protects you in the event of one big claim totally wiping out your coverage.
To determine the limit, factor in the type of business you write. Are you mostly personal lines, where the losses are typically smaller but with greater frequency? Or are you mostly commercial lines, where the values are more significant and the coverage often more complex?
Even within commercial lines, do you insure mostly "mom and pop" retail operations? Or are you writing high-risk exposures like school districts, heavy contracting risks, surety, med mal, aviation and trucking? And where are your risks located? Utica had E&O claims following Hurricane Katrina from agents as far away as Massachusetts that had insured exposures in the Gulf area.
There is also the "what is it worth?" method, with the agency purchasing its E&O limit based on the value of the agency. A fallacy of this approach is that your agency is worth more than the dollar value. You also have your reputation, your commitment to your staff and to the community, and all the hard work spent growing the agency over the years. Do you want to have to put your agency up for sale after an E&O claim? Unfortunately, this has happened to agencies that chose insufficient limits.
The best use of your buying dollars is to buy a higher limit, even if that means you need to buy a higher deductible to afford the cost. The cost to increase your per-claim limit from $1 million to $2 million is approximately 20 percent. Since most carriers will not allow midterm increases in liability limits, you should give this issue serious consideration at renewal time.
Details on deductibles
The two most common types of deductible are loss only and combined loss and expense. The most common is loss only, which provides first-dollar defense, meaning you will not have to pay the defense/legal expenses associated with an E&O claim. A combined deductible makes you responsible for the legal expenses associated with the claim up to your deductible limit. You get a credit for this type of deductible since you are incurring expenses whether a judgment is rendered against you or not. For consideration, you can save around 5 percent by increasing your deductible from $2,500 to $5,000.
If you're buying or selling an agency, there are several things to keep in mind. First, be sure to notify your E&O carrier–they will advise you of the implications and what to consider. If selling your agency, know that your policy is not assignable without the carrier's consent. Also, there are time limitations on when you need to exercise your "tail" options. A delay could leave you uninsured at a time when you want to enjoy retirement.
The E&O world is simple yet complex. Making a serious commitment to aggressive loss control can certainly make a big difference in whether a court officer comes knocking at your door. 10 Quick E&O Tips
Building a Good Line of Defense
o Document, document, document. If agencies took the time to document important carrier and client conversations, claims frequency would decrease dramatically. Since you don't know which file is going to cause an E&O claim and since you are only as good as your files, are you comfortable with the level of documentation in every file? Are your files prepared for the next hurricane? Nothing brings out mistakes quicker than a catastrophe.

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